Buy Hold Sell: 5 stocks the pros have been buying

If there is one thing we can take away from what has been a very tumultuous 2022, it is that it's been a year of very few winners and many losers. 

Perhaps that's why so many investors are now turning to "expensive defensives", giving up valuation in the hope that these crowded trades will help bolster their portfolios against any future falls that may lay ahead. 

So in this episode, Livewire's Ally Selby was joined by ClearLife Capital's David Moberley and QVG Capital's Josh Clark for their analysis of five stocks professional investors have been hiding within in recent months. 

And spoiler alert, there's only one that David and Josh can agree upon. 

Note: This episode was filmed on Wednesday, November 9th 2022. You can watch the video, listen to the podcast, or read an edited transcript below.

Edited Transcript

Ally Selby: Hey, how are you doing? And welcome to Livewire's Buy Hold Sell. I'm Ally Selby, and today we're taking a look at some of the most widely held stocks in professional investors' portfolios. To see if our guests like them too, we're joined by Josh Clark from QVG Capital and David Moberley from ClearLife Capital. 

First up, we have IPH Group. It's an intellectual property services firm. Josh, I'm going to start with you. Is it a buy, hold, or sell?

IPH Group (ASX: IPH)

Josh Clark (HOLD): I'll be boring straight from the get-go. I think it's a hold. I just think the stock needs to be a bit cheaper and have a bit more upside for me to call it a buy, as opposed to a hold. If you look at how you build the bridge to the return that you get out of the stock, you might start with organic growth. So that was around 2% last year. That's a pretty low starting base. It's on a pre-tax earnings yield of around 7%. So that certainly helps get you there.

But for me, it looks like that valuation is pricing in M&A. They’ve got a long and successful track record of executing, but you don't really want too much of that to be priced into the stock, and I don't think that you can necessarily look at everything on an absolute basis. Because if you look at relative opportunities out there, I know the question's on IPH, but there's another company called Hansen Technologies (ASX: HSN) out there that's got really similar organic growth, really similar returns on capital, and a great track record of M&A - just like IPH. Offshore earnings are also very analogous despite being a very different business, and it's trading on a 40% lower multiple. So I think that almost in and of itself puts IPH on hold.

Ally Selby: Okay. Its share price has lifted around 9% since the beginning of the year, so it's well outperformed the market. David, is it a buy, hold, or sell?

David Moberley (SELL): It's a sell from us. I agree with everything Josh highlighted. They've done a great job integrating that recent acquisition in Canada. There's definitely some upside in earnings on the translation of the foreign currency that they're exposed to, but the valuation and the medium-term growth outlook just don't really justify the share price. So it's a sell from us.

Johns Lyng Group (ASX: JLG)

Ally Selby: Okay, next up we have building services company, Johns Lyng Group. It's down 27% since the beginning of the year. David, is it a buy, hold, or sell?

David Moberley (SELL): This is a tougher one. For the purposes of staying off the fence, I'll say sell. And the reason for that is, again, we really like management and it's a great medium-term growth outlook for the company. Short term, there has been some insider selling, which typically puts a bit of a dampener on the market, and there are a lot of people crowded in that name. And the valuation's just not good enough for us.

Ally Selby: Josh, I know you've liked this one in the past. Do you still own it? Are you buying it? Is it a buy, hold, or sell?

Josh Clark (BUY): I think it's a buy. And I'm honestly deeply offended that David has said that.

David Moberley: I had to choose that because it was either a hold or a sell.

Josh Clark: Well, there's a lot that I agree with. Yes, management has been selling. It isn't particularly cheap. It is well held. But if you go back to what they've done since IPO, they've grown earnings per share by 20%. So if you can find me more of those, please give me a call. Love those kinds of businesses.

And I think what they've done over the last four years is they've set themselves up really well to deliver not-too-dissimilar growth rates for the next four years. And I think that's where your return comes from. I think the opportunity set that these guys have got for growth is as long as your arm. That's core growth within the existing building repair business, organic growth with cross-selling strata, acquisitions within strata, and the disaster response vertical that they've just established and are seeing some success there. And probably the more exciting one would be the platform for growth that they've just bought and are building in the US. And there are some early signs of success there, I think, with the weather event that they've had in Florida accelerating that.

And these aren't just things that management is talking about. They're executing on them. Motivation just oozes from the top to the bottom of that business. They've got equity ownership right through to the front line of the business, and I think that will help the execution and that earnings growth going forward. So a buy.

PSC Insurance Group (ASX: PSI)

Ally Selby: Okay, next up we have PSC Insurance Group. It's seen its share price lift around 4% since the beginning of the year. Is that one a buy, hold, or sell?

Josh Clark (BUY): That one's a buy. If you had a category of bottom drawer stocks, I'd pick that one for that. You can sleep soundly at night with PSC Insurance, knowing that there's a significant portion of insider ownership within the business that has a really prudent track record of capital allocation. If you wanted to try and build the return profile for that stock, you might add a few percentage points worth of insurance policies sold, a few percentage points worth of increases in price on those insurance policies, and another 2.5% dividend yield helps get you towards a market type return.

But they've delivered something like an 18% EPS compound annual growth rate over the last five years, which is well in excess of that. And then M&A is the real big one. That's how they've really managed to juice that earnings growth, by prudently acquiring and integrating, paying the right price for similar businesses and folding them in. So I think that one's a buy.

Ally Selby: Yeah, EPS actually grew by 28% over the past year. Over to you, David. Is it a buy, hold, or sell?

David Moberley (BUY): Solid agreement here. It's a buy for us. Founder-led, as we've just highlighted. We love that. Secondly, the growth drivers of the business, as Josh highlighted, are really independent of the cycle. So the broader macro softness is unlikely to impact these guys, and we're seeing quite strong growth in premium rates across the insurance sector, which they're a beneficiary of. So they've got some acquisitions, some great growth. It's not screamingly cheap, but it's probably never going to be cheap, given that outlook. So it's a buy from us.

Macquarie Telecom Group (ASX: MAQ)

Ally Selby: Next up we have Macquarie Telecom Group. They provide cybersecurity and telecom services to mid to large businesses and government customers. That seems really timely, considering everything that's going on. David, is it a buy, hold, or sell?

David Moberley (HOLD): It's a hold from us. Agree with you, Ally. The asset base is great and they're very exposed to the growth in cloud computing and data security. And I think that's going to be a great space over the next few years. But the valuation more than captures that. So a hold from us.

Ally Selby: Its share price has fallen around 22% since the beginning of the year. Josh, is it a buy, hold, or sell?

Josh Clark (SELL): I think it's a sell, actually. It's another great ASX success story, still run by the founders, but I think there are a couple of key things that have changed within the business in the last few years. So it's moved from effectively a telecommunications multiple to a data centre multiple. So the valuation is now towards double the multiple that you were paying, if you look back far enough, so it's much more expensive.

But then also, it's gone from being a really capital-light business to a really capital-heavy business as they plough a lot of money into data centres. The returns on that investment look like they're lower than the core business, and returns within data centres look like they're potentially even declining a bit, just given the mix moving more towards wholesale, cloud, and hyperscale-type customers. So I think for those two reasons, it's a sell.

Whitehaven Coal (ASX: WHC)

Ally Selby: Last one for today, it's no surprise, it's Whitehaven Coal. Fundies have been absolutely loving this stock and for good reason too. Its share price is up 220% in 2022. Josh, is it a buy, hold, or sell?

Josh Clark (HOLD): It's a hold. I think Whitehaven has some pretty extreme opposing scenarios. Firstly, you've got to make note of the fact that the thermal coal price has moved from trading in a band of maybe US$50 to US$100, and it's now many, many multiples of that. So it looks incredibly expensive on long-term forecasts or longer-term historic prices. And then it looks ridiculously cheap on spot thermal coal prices.

One thing we know is that thermal coal prices have got to come down at some point. In no small part, the energy crisis in Europe and the European war has had upward pressure on that thermal coal price. Inventories are starting to look a bit better. Those phenomena are not permanent. So the price will move lower at some point.

So the game you're trying to play is to get paid back on a really cheap multiple before that commodity price starts moving down. I've never seen a commodity stock hang in there and not go down when the commodity price is going down, regardless of what the numbers say. And even though they're quite extreme scenarios, I think they're fairly balanced. So Whitehaven's a hold. 

Ally Selby: Okay, over to you, David. Is it a buy, hold, or sell?

David Moberley (SELL): I'm going to say sell for us, Ally. I agree with Josh, the commodity price has been incredibly strong. The company's absolutely spewing out serious amounts of cash, so they're currently undertaking a buyback of up to 25% of their shares. But I think that's more than captured in the share price at this point. And while the commodity price has been strong, there are some signs of that softening at the moment.

And I think, agreeing with Josh, it's pretty rare that a commodity company outperforms while its commodity price is headed down. Very hard to say when that will happen, but we like to be a little bit more contrarian when it comes to commodity stocks. And when the commodity price is trading multiples of the cost curve, it's typically not the time to get too excited. So sell from us.

Ally Selby: Well, that's all we have time for today. I hope you enjoyed that episode of Buy Hold Sell as much as I did. If you did, why not give it a like? Remember to subscribe to our YouTube channel. We're adding so much great content every week.

Can't get enough of Buy Hold Sell?